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Micro Focus improves cash generation, but debt issues predominate

Renegotiation of debt and strong cash generation has enabled management to improve the dividend
Micro Focus improves cash generation, but debt issues predominate
  • Cash conversion ratio falls because of working capital
  • Revenue forecast to avert decline next year

Software and consultancy business Micro Focus International (MCRO) is still fighting to get to grips with its disastrous purchase of Hewlett Packard's enterprise software business by stripping out costs. This leaves it in an interesting spot to handle interest rate rises while it tries to maintain healthy dividends and strong cash generation, as well as keeping the lid on its massive debt pile.

Adjusted cash profits were down 12 per cent to £1bn for the year to 31 October. But the statutory operating loss narrowed appreciably due to a big reduction in depreciation, amortisation and exceptional item costs. Excluding these exceptional charges, adjusted free cash flow was $292mn (£216mn). This more than halved year on year due to one-off tax payments and working capital outflows.

Cash conversion was also down from 113 per cent to 87.1 per cent. However, management is expecting an adjusted free cash flow run rate of approximately $500m on an annual basis in 2023, with a flat revenue trajectory. 

The biggest concern is the $4.2bn net debt burden (excluding lease liabilities). Micro Focus has managed to extend the average maturity of its debt pile to 3.6 years from 2.7 years, and has used this breathing space to increase the final dividend to 20.3¢ from 15.5¢ last year. 

House broker Numis forecasts that net debt will fall to $3.59bn by 2023 and expects the free-cash-flow yield to rise to an impressive 15.3 per cent by then. This is progress of sorts, but Micro Focus may find it harder to meet its debt commitments given the probable trajectory of interest rates. However, with the shares trading at a 36 per cent discount to net assets and improved cash generation, we move (gingerly) to hold.

Last IC View: Sell, 514p, 2 Feb 2021

MICRO FOCUS (MCRO)   
ORD PRICE:394pMARKET VALUE:£1.32bn
TOUCH:393.4-394p12-MONTH HIGH:596pLOW: 327p
DIVIDEND YIELD:3.8%PE RATIO:na
NET ASSET VALUE:840¢*NET DEBT:$4.18bn
Year to 31 OctTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
20193.35-0.34-4.87nil
20203.00-2.94-88515.5
20212.90-0.52-12620.3
% change-3--+31
Ex-div:10 Mar   
Payment:21 Apr   
£1=$1.36 *Net asset includes intangible assets of $8bn or 2,383¢ a share.